Although I make my living in finance, the business frustrates me daily. That's because:
- It's hard.
- There are days that don't make any sense.
- Sometimes I lose money.
There's a reason, after all, that the money we put into stocks is known as "risk capital" -- every penny of it is at risk. Think if you own shares of Warren Buffett's superconglomerate Berkshire Hathaway (NYSE:BRKb) that your money is bulletproof? It isn't. Events beyond anyone's control could render that, or any other company, worth zero.
Speaking of hyperbole .
Sure, the Berkshire-goes-bankrupt scenario is pretty unlikely, but by the same token, how likely did it seem 20 years ago that we'd be talking about bankruptcy at General Motors (NYSE:GM), that AT&T (NYSE:T) would have been merged into a Baby Bell, or that discount air carrier Southwest Airlines (NYSE:LUV) would have a larger market cap than AMR (NYSE:AMR), UAL (NASDAQ:UAUA), Continental Airlines (NYSE:CAL), and all of the "legacy carriers" combined?
This kind of economic uncertainty is what makes mistakes inevitable in investing. It's also the reason why neither you, nor I, will ever reach perfection. Even if we make consistently wonderful decisions and execute them faithfully, fate will always throw us outcomes we don't expect.
What a dismal prediction. What's the solution?
But while mistakes are inevitable, they're precisely what make investing so rewarding -- provided you learn and profit from them. As Warren Buffett once quipped about golf, "If every shot was a hole in one, you'd lose interest in the game."
As I see it, the first step toward profiting from our mistakes is to accept the fact that we will make them. There will, in other words, be days we lose money. So be prepared. We advise members of our Hidden Gems small-cap investing service to be ready to stomach 25% or more drops in their stocks. Until days like that started happening this summer, many of our members still didn't believe it could happen.
Of course, sometimes those drops are warranted and sometimes they're not. Every drop, however, requires careful examination. If the drop was your mistake, learn from it and don't make it again. If it was the market's mistake, then you may have a buying opportunity. As Hidden Gems co-advisor Bill Mann told me the other day, "The best investors learn from their mistakes. The worst won't notice or won't admit they actually made a mistake."
The Foolish bottom line
The importance of learning while you invest cannot be understated. That's why our dual purpose at Hidden Gems is not only to identify superior small-cap opportunities for our members, but also to help our members follow their companies and learn to identify superior small-cap opportunities for themselves.
If that sounds like something you'd be interested in pursuing with our community of small-cap investors that's now tens of thousands strong, click here to sample our service free for 30 days. While there is no obligation to subscribe, it's only by finding great small companies and then following them intelligently over the long haul that we will all achieve market-beating results.
AT&T is a former Stock Advisor selection.
Tim Hansondoes not own shares of any company mentioned in this article. No Fool is too cool fordisclosure.
